Chile’s Tax Reform: An Answer to Education Woes?

Just like the cueca (Chile’s national dance that will be on full display during Independence Day celebrations this weekend) Chilean politicians were running round in circles last week over controversial tax reform legislation to overhaul its protested education system.

The bill, which will increase education-allocated government revenue by $1.23 billion, originally did not clear the Senate—where it was rejected on August 28 by a vote of 6 yeas, 19 nays and 7 abstentions.

The legislation had included a welcomed increase of the top corporate tax rate to 20 percent. But it also included controversial measures, including a 2-to-5-percent tax decrease—compared to 2011—for the top income-earners in Chile as well as incentives for children in private subsidized schools.

Senator Ricardo Lagos Weber from the Partido para Democracia (Party for Democracy—PPD) opposed the hefty tax cuts for the country’s most wealthy—or about 81,000 Chileans that fall within the top two tax brackets, earning between $7,142 and $12,040 per month.

“I have all the good will to finance education, but I have no desire, and do not have any provision, to lower the taxes on those who have more in Chile,” Weber told Radio ADN before the vote.

Noam Titelman, president of the student federation of the Universidad Católica de Chile, was equally unimpressed.

“This clearly is not the tax reform that will save the little public education we have left,” the student leader remarked to Cooperativa. “To have a tax system in which for each peso given to public education 2.5 pesos is given to private education evidently shows a bias toward private education.”

Finally, provisions favoring the wealthiest were cut from the bill after the efforts of a “mixed committee” of five senators and five deputies to make the legislation more favorable to opposition parliamentarians. The Senate passed the revised bill on September 4.

The committee unanimously agreed on the reformulation of the bill, which saw the addition of a tax increase on cigarettes of 38.8 pesos ($0.08) per pack, and the introduction of a new mandatory electronic invoice system. Senate President Camilo Escalona said these measures would bring in new revenues of $50 million and $400 million, respectively, with the latter helping to reduce tax evasion.

In the revised version, which received 76 votes in favor, 29 opposed and 5 abstentions in the Chamber of Deputies, tax breaks were also extended to include families of students who attend public schools and tax rebates for the lower-middle class. In both versions of the bill tax rates for lower-middle income families—those earning between 535,000 pesos ($1,070) and 2.7 million pesos ($5,400) monthly—dropped between 4 percent and 20 percent at both ends of the scale.

The administration of President Sebastián Piñera has also promised that the money generated from this reform—about $880 million annually—will be seen by the education system at all levels.

“With this Chile wins, everyone wins and I think that it is a very good day during which we have been able to achieve this understanding,” Finance Minister Felipe Larraín noted. Larraín is calling the bill Chile’s second-biggest tax reform, in terms of revenue, since its return to democracy in 1990.

Allies of the president are proud of the reform as well. “[It] will cover 60 percent of the most economically vulnerable sectors of the population, double the subsidies to preschools and more than quadruple the scholarships for higher education,” said Senator Francisco Chahuán of the Partido Renovación Nacional (National Renewal Party—PNR), according to The Santiago Times.

Addressing the wealth inequality in Chile is vital to improve access to quality education. Despite Chile’s positive image as an economic model in Latin America it was ranked as the OECD member-state with the highest inequality.

“This compromise toward quality education […] is a powerful tool to compensate deficiencies in low-income households and advance toward better equality of opportunities,” Piñera said following the reform’s approval.

Many are cynical, however, about the motivation for the bill. There is no doubt that the approval of the reform is timely for Piñera’s conservative coalition that faces municipal elections that begin on October 28.

Chile’s students, who have been protesting since 2011 for free high-quality education, are unsurprisingly not satisfied with the reform.

“The tax reform is important, but it does not meet the student demands as it claims,” President of the student federation of the Universidad de Chile Gabriel Boric lamented. “We are tired of knocking at doors that do not open, of talking to deaf ears and now we are going on the offensive as a social movement.”

The more than $1 billion freed up to improve education represents about 0.4 percent of Chile’s GDP. As well, the tax rate placed on large business still remains well below Latin America’s average rate of 25.06 percent in 2011.

Protests are therefore expected to continue, replete with marches and tomas (school occupations) that will indubitably disrupt the end of the Chilean academic year. Santiago Mayor Pablo Zalaquett and Education Minister Harald Beyer have offered students an absolute ultimatum of September 20 to return to class.

Those who have not crossed the threshold of 85 percent class attendance are being threatened with expulsion. This only perpetuates a nervy intervention from a government evidently aware that when it takes one step forward in the shuffling but dramatic dance toward education reform in Chile, their partner—the students and Chilean people—feels as if it takes two steps back.